Prime Minister Sheikh Hasina recently announced plans to merge the struggling Padma Bank with another banking institution to protect its customers and stabilise the financial sector. However, the merger process is expected to take some time.

More than a dozen other banks are also experiencing financial difficulties due to high levels of default loans and scandals, putting pressure on the banking sector and fuelling debates about potential mergers.

Bangladesh Bank is implementing a year-long prompt corrective action (PCA) for these troubled banks and is developing a strategy for their mergers with more stable banks, according to Mezbaul Haque, a spokesman for the central bank.

The government has endorsed this approach, under which the central bank will categorise the beleaguered banks as vulnerable.

On Feb 7, Hasina told parliament that efforts to merge banks, including Padma Bank, are underway, alongside other initiatives to shore up the sector.

A senior official from Bangladesh Bank said that Padma Bank might be merged with the state-owned Sonali Bank, although this has yet to be confirmed.

As part of the plan, Sonali Bank's Managing Director Afzal Karim has been named chairman of Padma Bank.

Previously, the central bank relaxed regulations under the Bank Company Act, allowing the managing directors of four state-owned banks and one non-bank financial institution to become directors at Padma Bank.

These steps are being taken amid concerns from economists about the large number of banks in Bangladesh.

The central bank also believes the number of operational banks in the country should be reduced, although the details are still being finalised.

It has been suggested that smaller banks, those with deposits and loans around Tk 100 billion, will be among the first considered for this process.

PADMA BANK

Before the Awami League's fourth consecutive electoral victory, Prime Minister Sheikh Hasina pledged substantial reforms within Bangladesh's financial sector.

These reform efforts began under the International Monetary Fund's loan programme.

As part of these efforts, the Bangladesh Bank identified 10 banks as weak and implemented a PCA for them, establishing benchmarks for various financial indicators. Banks failing to meet these standards could face penalties or potential mergers.

The effectiveness of the PCA will be evaluated based on the financial reports of 2024, making it clear by March 2025 which banks remain weak.

Additionally, Bangladesh Bank has proposed mergers in its 17-point plan aimed at reducing the sector's mounting bad debts.

Amid these reforms, Chowdhury Nafeez Sarafat resigned as chairman of Padma Bank, to make way for Sonali Bank's Afzal. Nafeez is also the chairman of Race Asset Management PLC and trustee board chairman of the Canadian University.

Padma Bank, which began its journey as Farmers Bank in 2013 after the government approved licences for nine new banks, faced survival challenges just three years after its inception.

Its ownership and management underwent a significant overhaul in 2017 to prevent total collapse, with Muhiuddin Khan Alamgir, a former presidium member of the Awami League, stepping down as chairman.

To rescue Farmers Bank from financial distress, the government provided Tk 7.15 billion as stimulus, accounting for 66 percent of the bank's capital, through Sonali Bank, Janata Bank, Agrani Bank, Rupali Bank, and the Investment Corporation of Bangladesh.

Upon its rebranding to Padma Bank in 2019, it reported over Tk 30 billion in defaulted loans. By the end of 2023, its bad debts still exceeded Tk 30 billion, representing 64 percent of its total loan disbursements.

The bank's deposits stood at approximately Tk 61.41 billion, including Tk 28.5 billion from state-owned banks, the ICB, and the government’s Climate Change Trust Fund. These organisations are now struggling to recover their investments.

"Merging two weak banks won't be beneficial," he said, emphasising that the goal of a bank merger is to bolster weaker institutions by leveraging the strengths of more robust banks.

He added that the success of such mergers hinges on ensuring transparency and accountability throughout the process.

Zahid explained that the Bangladesh Bank's implementation of PCA serves to identify struggling banks.

"When the evaluation report comes in, others will get an idea about the status of the banks. It would then have to be seen if any bank voluntarily wants to join the merger process or not. That is, whether anyone has any interest in acquiring a weak bank."

He also highlighted the strategic considerations strong banks must weigh when contemplating the acquisition of weaker ones.

Zahid pointed out that while strong banks aim to protect their commercial interests, the acquisition provides access to the customer base and deposits of weaker banks.

However, it also requires assuming responsibility for the weaker bank's employees, non-performing loans, and any financial misconduct.

Prof Mustafizur Rahman from the Centre for Policy Dialogue pointed to the financial implications of such mergers.

He notes that integrating the balance sheet of a weak bank with that of a stronger one could initially lead to an increase in default rates and pressure on profitability and depositor repayments for the acquiring bank.

Successful navigation of these challenges could lead to profitability for the strong bank, according to him.

The Bangladesh Bank is aiming to implement a 17-point roadmap for banking reform by June 2026, which includes a provision that no employee from a merged weak bank can be laid off within three years after the merger.

However, Zahid expressed concerns about this requirement, arguing that it might deter strong banks from proceeding with mergers.

He believes that the individuals responsible for a bank's poor performance should not be retained, likening the requirement to "swimming with your hands and feet tied”.

Zahid suggests that the Bangladesh Bank should invite expressions of interest from well-performing banks to propose mergers based on their capabilities and interests, thereby ensuring a more strategic and beneficial consolidation process within the banking sector.

Sarwar Hossain, a spokesman for the central bank, explained that the Bangladesh Bank's roadmap includes measures to protect employees during bank mergers, aiming to prevent widespread layoffs or unethical practices.

He noted, however, that there would still be room to address individual accountability for a bank's poor performance.

Prof Abdullah Al Mahmud from Dhaka University's banking and insurance department criticised the timing of considering mergers, arguing that interventions to assist weak banks should have occurred much earlier.

He pointed out that no bank becomes weak overnight, suggesting that mergers might offer a temporary fix but won't address the underlying issues or accountability unless the root causes and responsible parties are identified.

Prof Abdullah also suggested reducing the number of banks in Bangladesh from 61 to about 40 in a bid to simplify oversight for the central bank.

Zahid Hussain echoed Prof Abdullah's sentiments, emphasising the necessity of identifying those responsible for a bank's weaknesses to understand and address the reasons behind its decline.

He compared the situation to a doctor attempting to treat a patient without a diagnosis, highlighting the challenges strong banks might face in resolving the accumulated problems of weak banks without clear accountability.

Responding to concerns raised by economists, Bangladesh Bank spokesperson Mezbaul Haque said that guidelines would be developed and refined within the legal framework ahead of any mergers. "These guidelines will contain detailed explanations of the process."